Choosing an IT investment
Deciding on a project by its cash flows: schedule, discount rate, net present value, internal rate of return, payback period, return on investment and criteria that cannot be priced.
- 21 cards
- 5 topics
- Free
The outline, topic by topic
Each topic is weighted the way the exam weighs it.
- Concepts
- Questions
- The numbers
- The curves
- Scenarios
A few cards from the deck
Discount rate: what is it?
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The annual rate used to bring a future flow back to its value today, reflecting the cost of capital and risk.
A euro received in a year is worth less than a euro today: at 10 %, 40,000 € in a year is worth 40,000 / 1.1 ≈ 36,364 € now.
100,000 € invested, then 40,000 € of gains a year for three years, at 10 %. What is the net present value?
- −526 €
- +20 000 €
- −100 000 €
- +526 €
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−526 €
36,364 + 33,058 + 30,053 = 99,474 € of discounted gains, minus 100,000 €: −526 €. +20,000 € forgets to discount (120,000 − 100,000); the sign is negative despite 120,000 € of gains.
A project is accepted when its net present value is … at the chosen discount rate.
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A project is accepted when its net present value is positive at the chosen discount rate.
At zero, the project earns exactly the required rate: you are indifferent. Below, investing at the required rate would do better.
Net present value: what is it?
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The sum of a project's flows, gains minus outlays, each brought back to today at the discount rate.
Positive, it says the project earns more than the required rate; negative, that it destroys value: gains brought back to today do not repay the outlay.